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How to Thrive in the Digital-First Future of Banking

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How to Thrive in the Digital-First Future of Banking

The competitive landscape in the European banking market has changed significantly particularly because of recent regulation...

4 Minutes Read

The competitive landscape in the European banking market has changed significantly particularly because of recent regulation favouring new entrants. This means competition is at an all-time high for incumbent banks.

Despite this, in our in-depth research with 300 senior banking leaders across the EU, only one-third of incumbents recognised the threat that the Revised Payment Services Directive (PSD2) poses to their business.

Digital-first challenger banks and fintechs are using automation – including artificial intelligence (AI) in the front office – and advanced data analytics in the middle and back office in order to provide high-level customer experience. Incumbents are also making progress in this regard but often have to deal with complex IT systems and additional regulatory oversight.

Incumbent banks are under pressure to adapt their business models to the new digital customer-first environment. Failure to accomplish this could place them behind the digital natives entering the market.

Four looming threats

The pressure on EU incumbent banks to adapt to the digital-first future is rising. Threats they may face include:

  1. PSD2 regulatory change is altering the competitive dynamic in the banking market by mandating that incumbents share their customer data.
  2. Fintechs and challenger banks are doubling down on targeting individual services of the banking value chain, threatening the incumbents’ position in these service lines.
  3. Technological innovation, including blockchain, has the potential to rewrite how banking services are delivered, potentially removing banks’ involvement in some service areas.
  4. The entry of big-hitting digital competitors, such as Google, Facebook and Amazon, could be a serious threat for incumbents.

But there is a solution. Incumbents that embrace a new model of banking – one that focuses on cultural and digital transformation and a customer-first approach – can become resilient to this new threat landscape.

The rules for resilience

In the face of rising digital-first competition, incumbents can only stay resilient if they adopt a new business model that shifts their strategic focus.

For a greater customer experience, it is essential that incumbent banks:

  • Use regulatory change as a catalyst – by kickstarting transformation initiatives
  • Create a culture of innovation – by collaborating and delivering a clear strategic focus
  • Embrace the threat of blockchain – by identifying risks and opportunities
  • Focus on the customers – by leveraging automation to enhance customer service

Using these strategies incumbents can transform the threat of regulatory change and digital start-ups into an opportunity.

A marketplace opportunity

Recent Open Banking regulation has created a new dynamic between incumbents, fintechs and challengers – smart incumbents are beginning to take advantage of this new ecosystem through an open marketplace model.

Those that adopt a marketplace model and take advantage of relationships with fintechs can adapt more efficiently to the changing customer expectations of banking.

There is also  a subset of incumbents emerging as “resilient banks”  who are placing much greater priority on improving the internal culture and the digital customer experience.

Of these resilient banks, 70 per cent have allowed a third-party fintech to make their services available via the bank’s platform in the last three years, compared to only 25 per cent of incumbents.

Future-proof, digital-first

As technology continues to lower the entry barriers for the banking industry, incumbents are put under even more pressure to adapt for survival. Industry dynamics continue to change, and resilience becomes even more essential.

Our recent research report, The New Banking Genome. Building the Resilient Bank of Tomorrow, takes a closer look at the framework incumbent banks need to compete with rising competition.


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